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Focus—Millenium Trade Round
World outlook improves
US to slow down
The outlook for world and OECD-wide growth has improved substantially in recent months. The slowdown has ended and growth in the OECD area is expected to average nearly 3% in 1999 and 2000, before easing to some 2.6% in 2001. The projections are more buoyant than those published last May, reflecting mainly unexpected near-term momentum of the US economy, a stronger resumption of growth in Japan and Korea, as well as a slightly better outlook for the European Union. OECD-wide inflation is expected to pick up somewhat, although, excluding high inflation countries, it should remain below 2% over the next two years, especially as monetary policies tighten. Fiscal policy should be kept tight too; in this respect, proposals for US tax cuts appear premature and Japan's fiscal position is worrisome.
Outside the OECD area, economic activity appears to be recovering earlier and more sharply than expected in most of the Dynamic Asian economies, while the economic situation in Russia and South America remains fragile. At the world level, output is projected to rise by 3% this year and then accelerate to about 3.5% in 2000 and 2001.
There are some downside risks to this positive outlook. A pronounced yen appreciation could derail the Japanese recovery, hurting the other economies in the region. Also, the earlier uneven pattern of growth between the three major OECD regions has resulted in large current account imbalances, with the United States running a wide deficit. There are concerns about possible over-valuation of US equity prices and a sudden rise in US inflation could trigger an abrupt change in investor sentiment. That might lead to a hard-landing, with potentially major effects.
In Korea and other Asian emerging market economies, while substantial progress has been achieved, financial and corporate restructuring is far from complete. There is a risk that with the rebound in activity, governments will delay the reform process. The recent return of capital flows to these countries may then become vulnerable to any weakening in the regional outlook.
Elsewhere, the economic situation remains fragile in South America and recoveries in most countries in the region are particularly sensitive to rises in OECD interest rates. Of course, much hangs on progress in the Millennium trade discussions; a poor start in Seattle might undermine the outlook.